Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Asia-PacificJune 1 2011

ADB meeting sees calls for financial innovation and the embracing of PPPs

Asian Development Bank president Kuroda Haruhiko's calls for sound financial systems to channel Asia's savings into its own development process and his support for public-private partnerships to mobilise finance for investments in key sectors have been welcomed throughout the continent.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
ADB meeting sees calls for financial innovation and the embracing of PPPsKuroda Haruhiko, president of the Asian Development Bank

The process of financial co-operation in Asia took a major step forward in early May, during meetings held in tandem by the governors of the Asian Development Bank (ADB) and regional finance ministers in Hanoi.

The Vietnamese capital hosted both the 44th annual meeting of the governors of the ADB and the 14th meeting of the finance ministers of the Association of South-east Asian Nations and China, Japan and South Korea (Asean+3).

More than 4000 delegates attended the five-day meeting and “engaged in very robust and concrete discussions", according to ADB president Kuroda Haruhiko, on issues including international monetary reform, regional financial stability and regulation, controlling inflation and capital flows and promoting private investment in regional infrastructure and economic and business conditions in the host country.

Time for growth

In his opening address at the ADB governors' meeting on May 5, Mr Kuroda stated that the massive damage inflicted on Japan by the recent 8.9 magnitude earthquake, which led to the loss of more than 30,000 lives, was “a shocking reminder of how vulnerable the world we live in is”.

He added that the vision of Asia, "with robust public services, quality infrastructure, sound financial systems and stable societies rising in harmony with the rest of the world”, was "not preordained”. He cited a recent ADB study, Asia 2050, that warned that many regional economies could fall into “middle-income traps”.

The study warns that Asia "must avoid falling prey to another bubble of excessively exuberant expectations” and “will need to formulate its own financial model”. This will help it avoid both “the over-reliance on self-regulation by market” that led to the global financial crisis of 2007-09 and “excessive central government control of banking-dominated financial systems”, instead becoming more open to “institutional innovation”.

The study also notes the urgent need to develop financial instruments and create an enabling environment for financing Asia's massive infrastructure and urban needs through public-private partnerships (PPPs) and public financial markets. In addition, Mr Kuroda stated: “In a world threatened by environmental degradation and climate change, Asia must fully commit to green growth."

He added that one of the continent's most pressing requirements was hard and soft infrastructure that would require up to $750bn in investments annually to 2020. He also said that “funding these infrastructure deficits were key to attaining inclusive growth”.

Mr Kuroda called for sound financial systems to channel the region’s savings into its own development process, in a reference to calls for the 'recycling' of some of the massive foreign exchange holdings by major east Asian nations, such as China with $2620bn and Japan with $1120bn.

The ADB president also stated that the ADB is “boosting its efforts to mobilise finance for investments in key sectors, through support for private sector development and PPPs, especially through co-financing programmes”.

Positive reactions

The call for a re-engagement of private sector financing met with a positive response from both public and private delegates. Bambang Brodjonegoro, head of the fiscal policy office of the Indonesian finance ministry, stated that Indonesia and other Asean nations aimed to “aggressively promote PPPs in infrastructure”. Mr Brodjonegoro also urged the ADB to help the development of PPPs through offering preferential financing and also take a more proactive role in “promoting greater understanding among governments and public and private sector banks” to increase investment in Asian government bonds.

Philip Erquiaga, director-general of ADB's private sector operations department, told a seminar on May 5 that Asia’s huge infrastructure needs “cannot be met by governments alone” and described as “unsustainable” the current breakdown of infrastructure financing, namely 20% from the private sector, 70% from governments and 10% from overseas development assistance. 

Mr Erquiaga said: “PPPs are a very real and attractive alternative for financing some infrastructure requirements, but must still be done by some member governments, together with international financial institutions, to formulate PPP frameworks that can meet key requirements."

He added that a clearer policy environment, setting priorities, evaluating potential transactions based on value for money and feasible credit evaluation mechanisms were needed “so that the investing public can feel comfortable”.

Peter Amour, CEO of AIF Capital, added: “As an equity investor, what we want to see is harmonisation in the region of rules to improve transparency in capital flows and make it easier to invest in top companies and capital markets."

Innovation needed

Shinohara Naoyuki, deputy managing director of the International Monetary Fund (IMF), stated that the goals of inclusive Asian development outlined by the ADB “will not be realised without financial innovation”. He said: "In Asia, we will not be able to raise consumption, and promote more inclusive development, unless we can raise the degree of access to household and enterprise funds.”

Mr Shinohara also stated that the Asian region has “ample room for deepening financial markets, including the corporate bond market". He added: "While managing capital inflows is a major issue on the agenda of the reform of the international monetary system, such capital inflows can also be opportunities for necessary financing for new growth engines. The issue is how to change its composition toward longer-term and more stable inflows and harness it into PPPs for infrastructure investment." 

"The story now is the deepening of capital and bond markets as this is the key to absorb capital inflows," said Gerard Lyons, chief economist of Standard Chartered Bank.

Infrastructure financing

In a seminar on catalysing infrastructure financing on May 3, Richard Samans, a senior adviser to the World Economic Forum, said that multilateral development banks such as ADB should change their roles to become "enablers" of private sector capital investment, especially in infrastructure, instead of acting primarily as direct lenders.

Mr Samans stated that the difficulty in attracting private sector funds into major infrastructure projects lay in risk. "The risk profile for many of these investments makes it difficult to sell internally," he said. Mr Samans also stated that the best use of funds placed in development banks such as the ADB "would not be to make $10bn in loans, but to be more creative in the use of that capital to crowd in five to 10 times that much through leverage with structured risk mitigation or return enhancement programmes".

In response, Ann Quon, ADB's principal director for external relations, said: "ADB has long focused on the role of the private sector in development and helps catalyse private sector financing for development projects in Asia and the Pacific by offering risk mitigation products, such as political or partial credit guarantees, or by taking a direct debt or equity stakes in purely private sector or PPPs."

Ms Quon added that ADB's Strategy 2020, released in 2008, mandates that "ADB will assume greater, but thoroughly assessed risks, and act as a catalyst for investments that the private sector might not otherwise be willing to make".

However, the IMF's Mr Shinohara injected a cautious note into such calls. He highlighted the fact that, although Asia weathered the recent global financial crisis relatively well, it "does not mean that we can be complacent". He warned that supervisory functions still need to be improved in the Asia-Pacific region.

Expanded AMRO role

Indeed, one of the few concrete developments at the Hanoi meetings was a related decision made during the 14th meeting of the Asean+3 financial ministers. During a news conference after the financial ministers' meeting on May 4, Indonesian finance minister Agus Martowardojo announced an expansion of the role of the newly established Asean+3 Macroeconomic Research Office (AMRO), into the field of regional financial supervision.

Mr Agus stated that AMRO, which began operations in Singapore in May, will implement the Chiang Mai Initiative Multilateralization (CMIM) and would "provide independent assessment on monetary and economic conditions in the Asean+3 countries". The CMIM, a fund that can be used by Asean+3 members to defend their currencies in a crisis, was expanded to $120bn in 2010 from the initial $80bn set in 2000.

In a joint statement issued on May 4, the Asean+3 finance ministers confirmed their endorsement of operational guidelines for enhancing the effectiveness of the CMIM currency swap mechanism.

The ministers also welcomed the establishment of AMRO, which, as the surveillance unit of the CMIM, "plays an important role to monitor and analyse regional economies and to contribute to early detection of risks, swift implementation of remedial actions and effective decision-making of the CMIM".

Was this article helpful?

Thank you for your feedback!

Read more about:  Asia-Pacific , Global economies , Policy